Investors flick switch on IPL

The sell-off came as the company warned challenging market conditions would persist in resource and agricultural industries in the next 12 months.

But its new $US850 million ($1.19 billion) ammonia plant in Louisiana in the United States would provide a buffer for Incitec Pivot (IPL), which would also benefit from a falling Australian dollar against the US currency and low American shale gas prices.

It was the Louisiana plant, which is 90 per cent completed, that excited some analysts, some of whom wrote notes with headlines such as 'Flying in the face of adversity' and 'Executing well in poor markets'.

But one investment bank, Morgan Stanley, was not convinced. Analyst Nicholas Robison said the Louisiana project and its forecast earnings had "overshadowed what appear to be deteriorating fundamentals for much of IPL's business" - both fertilisers and explosives.

"As these headwinds build, we continue to expect consensus earnings downgrades across FY16-18 to place pressure on the stock," said Mr Robison, who has a target price of $3.45 for IPL.

He said the explosive business - the earnings of which rose only 1 per cent in the 12 months to September 30 - could deteriorate further.

"Demand may now be in a permanent state of decline, albeit still with cyclical fluctuations, as a shift in global growth balance pressures bulk commodities and metals".

"Thermal coal is impacted by increasing environmental regulation, and in the longer term technologies displace both explosives and bulk commodity demand."

Meanwhile an El Nino - a weather phenomenon associated with a hot, dry spring and summer - would hit IPL's fertiliser business, and the Louisiana plant would provide "little offset until at least FY17", Mr Robison said.

"The development of an El Nino weather pattern in the Pacific is similarly expected to result in poor agricultural conditions in Australia in FY16. With demand weak, risks for both urea and DAP prices and volumes look biased to the downside. Production costs at IPL's plants also face upward pressure."

Chief executive James Fazzino acknowledged the past year and FY16 would be challenging. But he won praise from some analysts for delivering a 12 per cent lift in underlying profit to $398.6 million, and a 9 per cent revenue surge to $4.64 billion.

"IPL delivered a strong result despite challenging conditions facing the segments in which it operates," Moody's vice-president and senior credit officer Matthew Moore said.

The company's credit rating remained unchanged at Baa3, meaning it was subject to moderate credit risk, he said. "Increased earnings and operating cash flow allowed the company to fund its major capital projects while strengthening credit metrics and improving its position."

Mr Moore said IPL's credit rating was stable and could even be upgraded if the company continues to deliver strong earnings, which he said was possible, particularly as the Louisiana plant nears completion.

"Moody's expects the project will generate significant cash flow to support IPL's credit profile and improve metrics once productions ramps up" from the September 2016 quarter.

UBS analyst Ramoun Lazar said IPL's outlook was "all about Louisiana".

US shale gas prices have plummeted from about $US6 to $US2 a million British thermal units when the plant was commissioned.

Mr Lazar, who lowered his 12-month price target from $5 to $4.70 a share, expected a long-term gas price of about $US4 per million British thermal units, "which drives significant uplift in earnings and free cash flow through FY17" and beyond.

"Our forecasts provide $700 million per annum of free cash flow. We continue to see attractive medium-term value at current prices, with the stock offering an annual free cash flow yield of 12 per cent, and 5 per cent dividend yield two years out," Mr Lazar said in a note to investors.

Macquarie Wealth Management analysts said Louisiana remained a key part of their investment thesis.

"The plant is now eight months away from start-up. This should drive a step change in earnings and related cash returns to shareholders," Macquarie's analysts said in a note to investors, adding they expected Louisiana to accelerate earnings-per-share growth to 37 per cent in FY17.